Wholesale inflation comes in weaker than expected – The Daily Tearsheet

Vital Statistics:

Stocks are flattish as we round out a tumultuous week. Bonds and MBS are down.

The 10 year bond yield continues to climb, albeit at a slower pace. We are looking at a 4.44% yield pre-open. MBS will continue to be weak as long as the 10 year struggles to find a level. A big driver of MBS pricing in bond market volatility, given the optionality that is embedded in a mortgage. Volatility is a huge component in option valuation, so when bond markets are volatile, MBS pricing relative to Treasuries (i.e. MBS spreads) will be higher.

Bond market volatility has spiked, according to the MOVE Index, which is sort of like a VIX for bonds:

Until the MOVE Index comes back to normal levels, expect MBS spreads to remain tight. We will get a good look at spreads when AGNC Investment (a mortgage REIT that focuses on agency MBS) reports earnings in a couple of weeks.

Inflation at the wholesale level declined 0.4% MOM compared to an expectation of a 0.2% increase. On a YOY basis, wholesale inflation rose 2.7% versus expectations of a 3.4% increase. Ex-food and energy, wholesale inflation fell 0.1% MOM and rose 3.3% YOY, again below expectations.

JP Morgan reported earnings of $5.07 per share and revenues of $43.3 billion, which beat analyst expectations. Provisions for credit losses rose 76% on a YOY basis to $3.3 billion. JP Morgan CEO Jamie Dimon said: “The economy is facing considerable turbulence (including geopolitics), with the potential positives of tax reform and deregulation and the potential negatives of tariffs and “trade wars,” ongoing sticky inflation, high fiscal deficits and still rather high asset prices and volatility. As always, we hope for the best but prepare the Firm for a wide range of scenarios.”